Notes on the Economy – Q3 2024 Summary

A FEW CLOUDS ON THE HORIZON

Growth of U.S. real GDP in the second quarter of 2024 was a surprisingly strong 2.8%, annualized, versus 1.4% in the first quarter. That is well above consensus forecasts, as well as expert estimates for the economy’s longer-run growth potential. The July consensus Blue Chip forecast, for example, was 1.8%. The strong growth does not appear to be the result of a statistical quirk. It was led by consumer spending but was balanced with robust contributions from business fixed investment and government purchases.

In further good news, inflation came down in spite of the strong GDP growth. After jumping to 3.7% in the first quarter, the core personal consumption expenditure price index increased at a 2.9% rate in the second. In not so good news, labor markets continued to soften with, for example, the unemployment rate increasing to 4.3% in July, payroll employment slowing, and unfilled job openings falling.

The global economy continued to expand in the first half of the year and remains on an upward trajectory, although national economic growth rates have been diverse. The activity is primarily driven by the robust services sector, as the recovery in global manufacturing remains fragile. Many foreign central banks are struggling with how to revive economic growth while maintaining downward pressure on inflation.

HEADLINES – WHAT’S IMPORTANT

1. The Inflation Target for the Federal Reserve (Fed) Is Coming into Sight – Various measures of annual consumer price inflation are now within a percentage point of the Fed’s 2.0% target.
2. Interest Rates Will Soon Go Down – Absent a surprise development, the Fed is primed to lower its policy rate target in September.
3. A Soft Landing Is Not a Sure Thing – Celebrate with caution; thunder clouds are still on the horizon. Economic growth is poised to slow down, inflation is not yet at target, and labor market conditions are deteriorating.
4. The Outlook for Equities Is Unsettled; Near-Term Correction Risks Remain High – Stocks may tumble 15% to 20% from their July peaks. In the absence of recession, investors should use a correction of this size to add to stocks.

LOOKING AHEAD

The economy is poised to shift from growth in excess of the economy’s long-run potential to a period of more subdued advances. There are three reasons this is likely. First, it is what policymakers are shooting for. To relieve upward pressure on the general price level, demand for goods and services must be less than the productive capacity of the economy. If there is no unused capacity, excess demand will create a situation in which users of goods and services will, in effect, try to outbid one another for available products, thus putting continuous upward pressure on prices.

Second, although monetary policy only takes effect on the real economy with long and variable lags, from mid-March 2022 to the end of July 2023 the Fed raised the target range for the federal funds rate 525 basis points. Since then, it has kept the target at 5.25% – 5.50%. Monetary policy has arguably been tight for an extended period, and the Fed’s forthcoming rate cuts will likely be slow and measured. So, policy is likely to remain restrictive for some time after rate cuts commence.

Third, a number of recent economic data points suggest a slowdown is, or may soon be, underway. For example: Unemployment is on an upward track, and job vacancies are falling along with voluntary quits. Consumer credit card debt has slowed substantially, and delinquencies are close to a 13-year high. Home ownership is unaffordable for many, and home sales, starts, and permits are falling. Growth of capital spending on business structures is now falling, and core equipment orders have flatlined. Total business inventories appear too high relative to sales.

Although global economic growth is positive, central bankers as a group have not fully completed the policy shift from inflation suppression to output expansion. Still, it appears that, on average, global growth is relatively stable. The International Monetary Fund (IMF) currently projects full-year global growth of slightly more than 3.0% for both 2024 and 2025.

* The information contained within this edition of the Notes on the Economy Executive Summary is based on data released as of Aug. 16, 2024.

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